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Health-Care Picks for Contrarians


As reform gets closer, some prescriptions for your portfolio.

A transformation of the nation's health-care sector just took one step closer to political reality: On Saturday, Senate Democrats muscled together enough votes (60-39) to send a health-care reform bill to the Senate floor for debate after Thanksgiving.

Two major Senate votes remain: one to conclude the debate process and one to pass the actual bill, both demanding 60 vote thresholds.

The big sticking points, says Arthur Henderson, an analyst at Jefferies who covers the health-care sector, include abortion, tax increases, Medicare cuts, and the hotly debated public option.

In a research note released this morning, Henderson wrote that President Barack Obama desperately needs a victory since he has little first year progress to show the American public.

"No doubt, he and his staff will do everything possible to get health-care reform legislated before the State of the Union address in late January," says Henderson. "With mid-term elections looming, the pressure is definitely on."

However, Henderson believes that the final bill that ends up on the president's desk will be much smaller than what we've seen so far.

"Contentious issues like the public option will likely force compromise, contracting the bill's size and scope," the analyst wrote.

As for investment implications, as we noted in our article, Digging for Deals in Health Care, many of the attractions of the health-care sector remain in place: It's financially strong, cheap, and demographically well positioned. The political uncertainty now surrounding the space, say analysts, creates opportunities for contrarian stock pickers.

For his part, Henderson told his clients to take advantage of reform volatility by building positions now in managed care. There, he likes WellPoint (WLP) and Humana (HUM).

He also recommends home nursing names, specifically Almost Family (AFAM), Amedisys (AMED), Gentiva Health Services (GTIV), and LHC Group (LHCG).

Henderson believes these sectors remain overly discounted on reform fears and present a compelling opportunity for robust stock price appreciation as the reform process evolves and reimbursement visibility improves.

At the same time, the analyst advised clients to lighten positions in hospitals, labs, and health-care information technology, subsectors where reform-fearing stock pickers have been taking cover.

"We expect big subsector rotation as the reform process tapers," Henderson argued.

Jeffrey Saut, managing director at Raymond James, also had some ideas about how to play health care right now.

Big cap pharma, he says, is of particular interest to him. Worth noting, he wrote today, is that in Friday's fade many of the pharmaceutical stocks rallied, potentially telegraphing that the hastily conceived health-care bill isn't going to pass.

Saut suggests investors consider pharma for their portfolios, specifically Abbott (ABT), Johnson & Johnson (JNJ), and Pfizer (PFE).

Finally, we caught up this morning for a brief chat with Jeffrey Loo, an equity research analyst at Standard &Poor's, who covers this sector.

In general, Loo agrees with other analysts that the bill we end up with is going to be less ambitious than currently proposed.

"If health-care reform does get passed," the analyst tells us, "it is going to be watered down."

As for which subsectors to target for investment opportunity, Loo remains bullish on the generic pharmaceutical manufacturers.

"The main goal of health-care reform is access, quality, as well as lower costs," he says. "Clearly, one way of doing that would be increased usage of generics."

The analyst currently has Strong Buy ratings on Teva Pharmaceutical Industries (TEVA), Mylan (MYL), and Dr. Reddy's Laboratories (RDY).
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No positions in stocks mentioned.
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